Question

Problem 13-13 (modified) Possible outcomes for three investment alternatives and their probabilities of occurrence are given below. Failure Acceptable Successful Alternative 1 Outcomes Probability $ 60 @.40 90 0.20 120 0.40 Alternative 2 Outcomes Probability $ 70 @.20 165 0.40 250 0.40 Alternative 3 Outcomes Probability $ 70 0.30 220 0.50 395 0.29 Rank the three alternatives in terms of least risk to most risk. (Do not round intermediate calculations. Round the final answers to 3 decimal places.) Coefficient of Variation Alternative 1 Alternative 2 Alternative 3 Least risky Alternative (Click to select) (Click to select) (Click to select) Most risky Trey

Answer 1

Alternative 1
Scenario	Probability	Outcomes	Expected Return
Failure	0.4	60	24
Acceptable	0.2	90	18
Successful	0.4	120	48
Expected Return	90
Scenario	Probability	Outcomes X	X-Avg Return	(X-Avg Return)^2	P *(X-Avg Return)^2
Failure	0.4	60	-30	900	360
Acceptable	0.2	90	0	0	0
Successful	0.4	120	30	900	360
variance	720
SD= Sqrt of variance	26.833
Coefficient of variation	0.298
Alternative 2
Scenario	Probability	Outcomes	Expected Return
Failure	0.2	70	14
Acceptable	0.4	165	66
Successful	0.4	250	100
Expected Return	180
Scenario	Probability	Outcomes X	X-Avg Return	(X-Avg Return)^2	P *(X-Avg Return)^2
Failure	0.2	70	-20	400	80
Acceptable	0.4	165	75	5625	2250
Successful	0.4	250	160	25600	10240
variance	12570
SD= Sqrt of variance	112.116
Coefficient of variation	0.623
Alternative 3
Scenario	Probability	Outcomes	Expected Return
Failure	0.3	70	21
Acceptable	0.5	220	110
Successful	0.2	395	79
Expected Return	210
Scenario	Probability	Outcomes X	X-Avg Return	(X-Avg Return)^2	P *(X-Avg Return)^2
Failure	0.3	70	-20	400	120
Acceptable	0.5	220	130	16900	8450
Successful	0.2	395	305	93025	18605
variance	27175
SD= Sqrt of variance	164.848
Coefficient of variation	0.785

Least risky - Alternative 1

Moderate Risky - Alternative 2

Most Risky - Alternative 3

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